Depressing Thoughts About Groupon’s Model
A great deal has been written about Groupon’s rejection of a supposed $6 billion offer from Google. Most of the reports breathlessly describe the explosive revenue and customer growth the company has achieved in two short years and what a breakthrough the model represents. With over 40 million email subscribers, Groupon’s success is based on consumers responding to their daily deal emails, and sourcing high-quality offers that compel readers to respond. The story CEO and founder Andrew Mason told in his interview with Charlie Rose last week was that when they offered helicopter flying lessons in one of their daily email blasts, they sold 2,500 in one day. This compares to a business that had acquired only 5,000 customers in its 25 year history.
But haven’t we seen this movie before in the world of direct marketing? History has shown nearly every major new direct marketing paradigm sees impressive initial response rates, but depressing response rates over time. For example, when display advertising was innovative in the late-1990s (imagine websites without ads?), publishers saw click through rates in the 1-2% range, allowing advertisers to be charged a high cost per thousand impression (CPM) in the range of $35-40. Today, iMarketer and MediaMind report that display advertising click-through rates are 0.10 – 0.20% and CPMs of $2-3 – less than one tenth what they were ten years ago. Email has shown a similar sharp decline over time. Average click through rates for the early years of email campaigns in the 1990s were as high as 30-40 percent. Today, they range from three to five percent, again, a 10x drop.
Groupon conversion rates, supposedly, are now in the three to four percent range. What will those same response rates to the same consumers look like in five years? Will daily deals follow a fundamentally different model than every other new direct marketing medium? The benefit of being only two years old is that you don’t have a lot of vintage data to analyze. What has impressed me about e-commerce stalwarts like Amazon.com and Netflix is that they have stood the test of time and have grown ARPU (average revenue per user) over time. Consumers continue to have an appetite for books and movies, year-in and year-out, and the volume of new content changes rapidly. In contrast, the merchants in my community and the ones I regularly do business with do not change all that rapidly.
That said, Groupon is building a huge consumer database, a massive set of merchant relationships and a super-talented management team. Just as Amazon and Netflix have innovated beyond their initial model, Groupon has the capacity to replicate these results. But if it’s going to step into the multi-billion dollar winner’s circle, it will need to find a model that stands the test of time, and the reality of depressing response rates over time. Frankly, I hope they figure it out.
Jeffrey Bussgang is a general partner with Flybridge Capital Partners in Boston. The opinions expressed are entirely his own.
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Gareth Wong said on December 20, 2010
I would tend to agree with you Jeff, but as I eluded to in some of my previous private tweets at @GarethWong, the Groupon model sadly unsustainable.
Although I just tried Groupon (a major sized canvas print for price of a small canvas) and lately Keynoir in UK (more upmarket & exclusive products, they argue), essentially it helps raise awareness and potential reach but not necessary the B2C brands’ normal target audience..
Real sustainable Acid test (for long term ecommerce solution/upstart) is whether it would change consumer habit and continuously provide value (like ebay+paypal, alibaba for b2b or linkedin for directors of B2B firms networking etc.) .. there is only limited number of lobster or steak meals or 50% of suits.. but the retailers will start getting wise to the fact that the clientèle will not return as the price point to convert them just is not sustainable (unless it is part of a conglomerate operating a ‘basket’ approach of supermarkets)…
Biggest challenge for the whole dot.com or tech-crunch world is this, the REAL percentage of consumers that ‘transact’ and pay is sadly still not the majority (unlike myself, for majority of the joe blogg public, they still do not buy everything they need online… )
When we see the reports from broadsheets and investment banks like morgan stanley start talking about % of internet people that buy things, rather than % of population are on broadband, that is when the real sustainable business arrive in our ‘joe blogg’s world and we will then have some proper conversation about brands or services that WILL last..
Groupon I sadly say will not be around in its present form (just to be controversial) in 5years time… and I am not a betting man.
James Pruett said on December 20, 2010
A Free to Customer model is on it’s way at Get Grouby.com.
http://www.prweb.com/releases/2010/12/prweb4891164.htm
Daniel Haggard said on December 21, 2010
You’re absolutely right…
Groupon’s success is currently trading on the semantic value traditionally attached to the word ‘great deal’ (or simply just ‘deal’ where it includes the notion of superior value). We here that word and we think ‘value’, ‘savings’ – but also ‘scarcity’, ‘rarity’. When all those associations are in place – we rush to any mention of a ‘deal’ in order to cash in. We do this without even really thinking much whether or not we should be making those associations, because we start out trusting that the marketer is using the word appropriately.
Groupon’s growth (at least assuming the continuation of their current model as a marketing channel) – depends upon the mass provision of vendor ‘deals’. Vendors actually can’t really afford to always provide ACTUAL deals – so they just call it a deal and hope it brings the folks in. Essentially they are just stealing the authentic value we associate with the symbol and groupon implicitly encourages this. Like Pavlovs dogs, people will stop responding to the stimulus over time where the reward is not perceived to be present.
Groupon’s model is a dead end.
Rajesh Setty said on December 21, 2010
Jeff,
First of all, I love your book and your insights.
Here though, I have to respectfully disagree on your comparison of depressing response rates from another model. Here is my reasoning:
1. First growth rates are always high during the initial years for a company. Why? simply because they start from zero and even a small growth seems high in terms of percentages.
2. Response rates will also decrease with growth simply because the base gets larger. If Groupon’s response rates gets halved but the base doubles, they will still be just fine.
3. So many people are predicting the demise of Groupon model based on what they are doing currently. With the kind of cash they are generating, they can do a ton of things – expand to international markets, buy innovation and capture a whitespace opportunities in local markets that others can’t.
I am sure we agree that there is a reason Google went with a bid as high as $6B. My guess is that it was because of their serious interest in local markets. Groupon has cracked it in some sense and I am sure they are working as hard as they can to retain and grow further.
My $.02 of course.
Best,
Rajesh
Carl Ruzycki said on December 22, 2010
Groupon is an online version of the old bricks and mortar door crashers. They do it online. In the bricks and mortar program the merchant planned on selling other things once they were in the store. So it is up to the merchant to figure out how to recoup the dollars from the loss from the Groupon. The real issue is how does the merchant get the customers to come back again and again after the initial Groupon, wrong answer. Groupon is like a drag racing car with no second gear. After it launches hard, then what? Hold on and hope you don’t crash. Groupon needs a second gear. These merchants need a second gear to make Groupon work for the merchant. They need to attract the Groupon Whores to come back, over and over. Other local merchant coupon companies like http://www.couponnashville.com focus on providing the local merchant with their own tools and resources to create and manage advertising. They have access to the local radio stations to their advertising. Being a local merchant coupon program, the merchant has total control over the program – gets to create the coupons, make as many and as often as needed, gets monthly metrics for a cost much less than printed media. I call this a local merchant coupon that works for the merchant. If Groupon had this program they could get repeat customers as the program goes on long after the Groupon has died.
Groupon or off
Carl
Jeff Bussgang said on December 23, 2010
Thanks for the thoughts, Rajesh. If response rates drop by a factor of 2x, they’re in good shape. If it’s 10x, it’s a problem!